Selling This Stock Cost Me a Fortune

If you're like me, you made a few rookie mistakes in your early days as an investor: obsessing over daily moves in the market, not diversifying, that kind of thing. Most of us make mistakes like that -- and learn from them.

My biggest early investing "lesson," though, was a costly one. Think 2,254%-costly.

Don't go feeling sorry for me just yet, though, friend. Those early failings as an investor led me to adopt a proven strategy geared toward choosing stocks with the potential to crush the market over the long run -- just like the recommendation I'll tell you about shortly, in fact.

But you've probably made the same terrible mistake yourself: You sold a great business too soon.

The $20,000 mistake 
My epic blunder had to do with an itchy trigger finger. Someone made a fortune on Apple's stock -- but it wasn't me. That's because, after buying shares of Apple at a split-adjusted price of around $9 back in May of 2003, I sold them at the same price a week later. Today, Apple trades at about $211. Ouch.

If you're like me, you've probably bought -- and then sold too soon -- a stock like Apple, XTO Energy (NYSE: XTO  ) , Hansen Natural (Nasdaq: HANS  ) , or Autodesk (Nasdaq: ADSK  ) on its way to multibagger greatness.

In fairness, who hasn't? Who actually has the foresight and patience to consistently earn such mind-boggling returns?

My boss, that's who 
Meet Fool co-founder, Chief Rule Breaker, and Stock Advisor co-founder David Gardner. Eighteen of his Stock Advisor recommendations have doubled since the service's start in 2002. Four companies have more than quintupled.

Get a load of a few of these wins:

David's Recommendation

Date of Recommendation

Total Return

Amazon.com (Nasdaq: AMZN  )

05/21/04

783%

priceline.com

09/06/02

826%

Activision Blizzard (Nasdaq: ATVI  )

02/07/03

525%

Data as of Dec. 31, 2009.

It doesn't take too many multibaggers to set you for life. But how does David do it, exactly, and why can't you?

Summing up an investor's philosophy in a nutshell is next to impossible, but you can pretty cleanly distill David's approach into these two strategies:

Buy right: Choose companies that will benefit from undeniable, long-term trends. Case in point: Activision. Remember the days when only kids played video games? No longer. The video game industry has matured along with its now-grown earliest adopters, and industry leaders such as Activision have made a mint on the huge upswing in video game sales.

Buy early: Get in early on a great business, and don't haggle on the price. Case in point: Amazon.com. Here's a business that has been considered overvalued by virtually everyone -- including me -- since pretty much, well, always. But money talks, and David's recommendation of Amazon has been a smashing win for Stock Advisor members. He got in on a great business early and had the foresight and resolve to stick with it.

Stocks 2010 
That long-term, David Gardner-esque vision was exactly what I had in mind when I was invited to contribute alongside David and nine of the Fool's other top analysts and advisors in our flagship annual special report, Stocks 2010. I think you'll agree we've had a pretty good run with these reports over the years:

 

Average Recommendation's Return

Outperformance vs. S&P 500

Stocks 2003

114.4%

88.7%

Stocks 2004

22.1%

16.7%

Stocks 2005

4.8%

11.3%

Stocks 2006

(11.4%)

2.4%

Stocks 2007

(30%)

(7.7%)

Stocks 2008

(1.4%)

21.5%

Stocks 2009

59%

47.1%

Average

22.5%

25.7%

Returns data as of Stocks 2010's publication on Nov. 5, 2009.

My recommendation for Stocks 2010Yum! Brands. You may know Yum! as being the parent of quick-serve kingpins Pizza Hut, KFC, and Taco Bell, but you probably didn't realize that Yum! is effectively printing cash in the world's next superpower: China.

This is where David's "Buy Right" principle comes in. Per-capita Chinese wealth is looking at heady long-run growth, and the Chinese quick-serve market is nascent. Honestly, it doesn't take a visionary to see the potential for epic growth for China-focused consumer plays. Hardly a surprise, then, that China Mobile (NYSE: CHL  ) is also featured in Stocks 2010.

Now here's where the "Buy Early" principle comes in. Yes, Yum!'s core U.S. franchises have been cranking out profits for a long, long time. But consider the China opportunity, where Yum! has already established itself as the quick-serve industry's market leader.

China has roughly 600 million urban dwellers -- that's twice the entire U.S. population. Now consider that Yum! currently has about 6 times the number of stores in the U.S. that it has in China. Put another way, imagine getting in on a story like McDonald's (NYSE: MCD  ) a couple of decades ago.

To be super-duper clear, no, I don't expect Yum! to return 2,000% to investors over the next few years. I do, though, think it has the quiet makings of an incredible Chinese growth story, very much in the mold of the some of the biggest winners that David Gardner has recommended over the years.

Two for the price of one 
You can read more about Yum! and the nine other featured stocks in Stocks 2010, which comes free with new memberships to Stock Advisor. The average Stock Advisor recommendation has outperformed the market by 52 percentage points since the service's inception back in 2002 -- little wonder that Stock Advisor is the world's best-selling investment newsletter. Just click here to sign up -- you can cancel at any time.

This article was first published Nov. 27, 2009. It has been updated.

Senior analyst Joe Magyer owns no shares of companies mentioned in this article. Apple, Amazon, Activision Blizzard, and priceline.com are Motley Fool Stock Advisor recommendations. The Motley Fool owns shares of Autodesk and XTO Energy. The Motley Fool has a disclosure policy.


Read/Post Comments (3) | Recommend This Article (10)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 04, 2010, at 7:41 PM, captainccs wrote:

    When I realized that Hansen's Natural (HANS) sells obesity and type II diabetes to young people using sports role models, I decided to sell the stock. It's as bad if not worse than tobacco.

  • Report this Comment On January 06, 2010, at 8:42 AM, TMFJoeInvestor wrote:

    @captainccs,

    It isn't too difficult to extend that logic further: Should you sell your shares in any food companies that use unhealthy ingredients? How about selling the companies who supply Hansen, or those who supply them? What about the shares of the companies that supply their machinery, or sell them the electricity by which their plants run? The retailers who sell their products?

    I definitely understand your concern, but I think the better short call would be on the parents of young people who foster such unhealthy lifestyles and diets for their children. Thanks for the feedback!

    Joe

  • Report this Comment On January 08, 2010, at 12:44 PM, baekeland108 wrote:

    The ecology and the environment of our children and grandchildren is a lose-lose situation ...Buffet buys a train that carries that largest amount of coal in the world and I as a small investor also buy products to further ruin the environment. Oh, you could buy so-called "Green Products," but let's face facts: coal, oil and other polluting factors are used even in our attempts at going "Green" with solar powered devices.

    We are all guilty of helping to pollute the planet. Try buying supposedly "Green" products in the market for a year and other purchases of non-green products, which do you think would make you the most money? Hence, my lose-lose philosophy.

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